Revenue and Customs v Cassells

Rescission of a bankruptcy order under section 375 of the Insolvency Act 1986 requires exceptional circumstances involving a material difference from the position when the order was made. The applicant must show that the alleged new circumstance justifies rescission and produces a real, rather than theoretical, benefit.

An appellate court may intervene in a discretionary decision for error of principle, failure to consider a material matter or a decision that is plainly wrong. Mere disagreement about the weight given to relevant factors is insufficient. The court must consider the interests of other creditors, accrued costs, limitation consequences and the bankrupt’s cooperation with the trustee.

Her Majesty’s Revenue and Customs appealed from an order of District Judge Henthorn rescinding a bankruptcy order made against Shaun Christopher Cassells in 2003. The order had been made on tax assessments which were later shown to overstate his liability. The District Judge considered that Revenue and Customs’ failure to correct the position in 2004 deprived Mr Cassells of an opportunity to seek annulment when the bankruptcy costs were lower.

The appeal concerned whether that lost opportunity constituted an exceptional circumstance under section 375 of the Insolvency Act 1986, and whether the District Judge had properly considered the prospects of annulment, the interests of other creditors, limitation issues, costs and Mr Cassells’ failure to cooperate with his trustee.

1. The appeal was allowed. The order rescinding the bankruptcy was set aside and Mr Cassells’ application was dismissed.

2. Section 375 of the Insolvency Act 1986 confers a very wide discretion, but the applicant must establish exceptional circumstances involving a material difference from the position when the bankruptcy order was made. The principles stated in Papanicola v Humphreys [2005] 2AER 218 informed the exercise of that discretion.

3. The District Judge’s reliance on the lost opportunity to seek annulment was insufficient. It was necessary to establish both that Mr Cassells would have applied for annulment and that the application would have succeeded or produced some material advantage. The evidence supported neither conclusion. The assessments were legally enforceable, so annulment under section 282(1)(a) could not succeed. Annulment under section 282(1)(b) required payment or security for all bankruptcy debts and expenses, which had not been shown.

4. The appellate court rejected the submission that an error concerning the weight of a factor alone justified intervention. The applicable grounds were error of principle, failure to take account of a material matter, taking account of an irrelevant matter, or a decision that was plainly wrong, following the approach explained in AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 2 1 WLR 1507, Roache v News Group Newspapers Ltd [1999] E.M.L.R. 161 and Alltrans Express Ltd v C.V.A. Holdings Ltd [1984] 1 W.L.R. 394.

5. The District Judge had failed to consider the other unpaid creditors, the lapse of time, accrued interest, possible limitation prejudice and Mr Cassells’ serious and prolonged failure to cooperate with the trustee. Rescission could unfairly prejudice creditors and effectively confer the practical benefit of discharge without evidence that such relief was appropriate. The application was therefore dismissed. Costs were reserved for further argument.

• High Court (Chancery Division): Revenue and Customs appealed from the order of District Judge Henthorn dated 8 September 2008. The appeal was allowed, the rescission order was set aside and the application was dismissed.
• Liverpool County Court: District Judge Henthorn ordered rescission of the bankruptcy order made on 1 May 2003 under section 375 of the Insolvency Act 1986.